Before we talk about BREXIT and its impact on the Indian economy, let’s first understand what exactly it means. BREXIT is the name or the short form given to Britain’s exit from the European Union (EU). Britain’s exit from the EU will have a global impact and hence making rounds in the media.
On June 23, 2016, a referendum was held in which it was asked to voters “If the United Kingdom should remain a member of the EU or not?.” 52 percent of the voters had voted to leave however 48 percent wanted to stay in the EU.
The reason given by those who wanted to leave the EU was that it is necessary to move out of the EU in order to protect the identity, culture, independence of the country along with its place in the world.
Those who were in favor of staying in the EU said that by remaining in it the economic gains are more as compared to the other factors given by the people who are not in favor of staying in it.
BREXIT impact on Indian Economy
Former Reserve Bank of India Governor Raghuram Rajan had said that “We are in the midst of an age of competitive devaluation and beggar-thy-neighbor policy. When elephants fight, the grass suffers.”
BREXIT is creating fear amongst investors and businesses around the globe. The implication of the BREXIT will directly impact not only the Indian stock market but the global market in totality, including the emerging markets in the world. This is because of the high volatility in the pound.
This is not only making the stock market in India jittery but is also increasing the risk for the businesses in the country.
The exit of Britain from the EU will have a significant effect as it is the largest export market for India. The investors are concerned around the nation that it is going to have a negative effect as India invests more in the United Kingdom than the rest of Europe combined.
Both UK and EU account for 23.7 percent of Rupee’s effective exchange rate. With BREXIT, foreign portfolio investments will outflow and will lead to the weakening of the rupee.
UK’s third-largest Foreign Direct Investment (FDI) investor in India. There are more than 800 Indian companies in Britain.
The Indian companies and sectors that have invested in Britain are having sleepless nights while worrying about BREXIT. They believe that if Britain leaves the EU it will adversely affect the movement of investors into the UK and will directly impact the investment.
Britain is considered as a gateway to the EU for India, with it opting out, the advantage by India is lost. Therefore, there is a need to get border-free access.
BREXIT will hamper India’s businesses based in the UK as till now they had border-free access to the rest of Europe. This was the main reason why Indian companies go to the UK.
BREXIT may have an impact on the decisions of Indian companies to invest in the future.
UK accounts for 17 percent of India’s Information Technology (IT) exports. If Britain chooses to opt-out the overhead costs are also going to increase.
As per one of the reports by NASSCOM: “ Indian IT industry is going to experience a negative influence in the short term due to BREXIT.” The return of these companies is going to be affected because of the depreciation of the pound.
In totality, the sectors which will be affected because of BREXIT will be auto, auto components, metals, oil, pharmaceuticals, IT, etc.
However, RBI is trying to recalibrate the monetary policy in order to reduce market volatility.
All eyes are on October 31, 2019, which is the deadline for the UK to leave the European Union (EU). The day will decide the future of the global market.